Course: principle of microeconomics

Semester: two
Student Name: Abdullahi Mohamed Abdirahman
Faculty: Bachelor Business Administration
Department: Accounting and finance
Topic ; how time horizonal effect in price elasticity of demand
&supply?
Lecturer’s Name: Mr. Abdirahman Mohamed Adan
What is price elasticity?
Both demand and supply curves show the relationship between price
and the number of units demanded or supplied. Price elasticity is the
ratio between the percentage change in the quantity demanded, QsQd
start text, Q, end text, start subscript, d, end subscript, or
supplied, QdQS,start text, Q, end text, start subscript, s, end subscript,
and the corresponding percent change in price.

The price elasticity of demand is the percentage change in the quantity

demanded of a good or service divided by the percentage change in
the price. The price elasticity of supply is the percentage change in
quantity supplied divided by the percentage change in price.
Long-run vs. short-run impact
Elasticities are often lower in the short run than in the long run.

Changes that just aren't possible to make in a short amount of time are
realistic over a longer time frame. On the demand side, that can mean
consumers eventually make lifestyle choices—like buying a more fuel
efficient car to reduce their gas usage. And on the supply side, it means
that producers have time to do things like build new factories and hire
new workers.

Long-term and short-term demand elasticity

It can sometimes be difficult to change demand, QdQd start text, Q, d,
end text, in the short run, but it's much easier in the long run.Let's look
at consumption of energy as an example. In the short run, it's not easy
to make substantial changes in energy consumption. Maybe you can
carpool to work occasionally or adjust your home thermostat by a few
degrees if the cost of energy rises, but that is about all you can do. In
the long run, however, you can purchase a car that gets more miles to
the gallon, choose a job that is closer to where you live, buy more
energy-efficient home appliances, or install more insulation in your
home. As a result, the elasticity of demand for energy is somewhat
inelastic in the short run but much more elastic in the long run.

The diagram below is an example, based roughly on historical

experience, for the responsiveness of QdQdstart text, Q, d, end text to
price changes for crude oil. In 1973, the price of crude oil was $12 per
barrel and total consumption in the US economy was 17 million barrels
per day. That year, the nations who were members of the Organization
of Petroleum Exporting Countries, OPEC, cut off oil exports to the
United States for six months because the Arab members of OPEC
disagreed with US support for Israel. OPEC did not bring exports back
to their earlier levels until 1975—a policy that can be interpreted as a
shift of the supply curve to the left in the US petroleum market.
Long-term and short-term supply elasticity
On the supply side of markets, producers of goods and services
typically find it easier to expand production in the long run of several
years rather than in the short run of a few months. After all, in the
short run, it can be costly or difficult to build a new factory, hire many
new workers, or open new stores. But over a few years, all of these
things are possible.

Indeed, in most markets for goods and services, prices bounce up and
down more than quantities in the short run, but quantities often move
more than prices in the long run. The underlying reason for this pattern
is that supply and demand are often inelastic in the short run, so that
shifts in either demand or supply can cause a relatively greater change
in prices. But—since supply and demand are more elastic in the long
run—the long-run movements in prices are more muted and quantity
adjusts more easily.
How time horizon effect the price elasticity of
demand and supply?

The price elasticity of demand is directly proportional to the time

period. This means the elasticity for a shorter time period is always low
or it can be even inelastic
Time horizon: The longer the time period, the greater the elasticity, as
consumers have more time to adapt and find substitutes.
How does time affect demand and supply elasticity?
The price elasticity of demand varies directly with the time period. The
given time period can be as shorts as a day and as long as several years.
The price elasticity of demand is directly proportional to the time
period. This means the elasticity for a shorter time period is always low
or it can be even inelastic.